Question
Management Accounting: Case Study Company Coco Company Coco is a luxury chocolate manufacturer, which has recently been performing well. The board of directors is considering
Management Accounting: Case Study Company Coco
Company Coco is a luxury chocolate manufacturer, which has recently been performing well. The board of directors is considering how it should expand the business and is looking at a number of options. First, the directors need to produce a budget for the coming year and ensure that the business can maintain its profitability.
The marketing and production directors have given you, the management accountant, details of estimated product sales volumes and proposed sales prices, as well as expected raw material and factory costs. They plan to produce 20 chocolate bars in every direct labour hour.
The sales director is confident that he could increase sales prices with a small decrease in sales volume.
The marketing director would like to expand the product range by buying in fruit and nut chocolate bars from a supplier but has asked you to estimate what it would cost the company to make them instead.
The managing director has ambitious
plans to buy a moulding machine to save labour and packaging labour costs. Table MA.1
| Volume chocolate bars | Selling price per bar | Cocoa grams per bar | Sugar grams per bar | Milk millilitres per bar |
Dark | 80,000 | 2.00 | 170 | 30 | 0 |
Milk | 140,000 | 1.80 | 130 | 40 | 30 |
White | 60,000 | 2.00 | 0 | 70 | 130 |
Raw material costs |
|
| 4 per kg | 2 per kg | 1 per litre |
|
Table MA.2
*Factory indirect costs are currently allocated on a blanket rate. Packaging is estimated at 200 per 1,000 bars.
Direct labour costs are expected to be 10 per hour.
REQUIRED:
c) Assess the proposal of the sales director to improve company profitability by increasing sales prices and reducing sales volume, as in Table MA.3 . What other factors might affect pricing decisions?
d) Using the information in Table MA.4, advise the marketing director on whether it would be more beneficial to make fruit and nut bars rather than buy them in from another company for 1.70 per bar. What other considerations need to be taken into account?
e) The managing director has given you some estimates on which to base your calculations for the new moulding machine. If the business invests 300,000 in equipment, he forecasts that they could save 50% of direct labour costs and 25% of packaging costs; but utility costs would increase by 5%. By calculating the net present value over the next five years using a discount rate of 7%, advise the board whether it should invest in this project. You should also outline the limitations and non-financial factors that need to be considered.
Table MA.3
Sales directors volume and price assumptions | ||
| Increase price | Decrease volume |
Dark chocolate bars | 10% | 10% |
Milk chocolate bars | 5% | 5% |
White chocolate bars | No change | No change |
Table MA.4
Fruit and nut: raw material costs | ||
Per bar | Quantity | Cost |
Cocoa, sugar, and milk | Assume 50% of milk bar |
|
Fruit | 50g per bar | 4 per kg |
Nut | 50g per bar | 8 per kg |
Direct labour, packaging, and factory overhead | Cost per bar: use same assumptions as other chocolate bars |
|
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